Geithner to warn on fiscal cliff

The U.S. financial system has regained its footing since the crisis of a few years ago but is still threatened by instability in Europe and uncertainty about taxes and spending at home, Treasury Secretary Timothy Geithner will tell a House committee on Wednesday.

In offering his takeaway from the annual Financial Stability Oversight Council report, Geithner will highlight falling debt among financial companies and individual citizens, according to a copy POLITICO obtained of his prepared remarks for a House Financial Services Committee hearing. And he will challenge Congress to make policy choices sooner rather than later to give the financial sector a greater sense of stability.

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But it is Geithner’s response to questions on Libor, the London interest rate benchmark, that will have Wall Street bankers and congressional overseers on the edge of their seats.

Rep. Randy Neugebauer, who sits on the panel, wrote a letter on Monday to Willam Dudley to ask what the New York Federal Reserve Bank did in 2008 about evidence that international banks were manipulating rates. Dudley is the New York Fed’s current president, and Geithner was its chief at the time.

“The role of government is to ensure that our markets are run with the highest standards of honesty, integrity, and transparency,” the Texas Republican wrote. “Therefore, any admission of market manipulation — regardless of the degree — should be swiftly and vigorously investigated.”

Neugebauer asked for five years worth of documentation on conversations New York Fed employees had about Libor in addition to information that already has been made public about the New York Fed’s Libor concerns.

Three American banks are among the group that sets the Libor rate: JPMorgan Chase & Co., Bank of America Corp. and Citigroup Inc. Last month, Barclays of London was punished by U.S. and British regulators for its part in manipulating the rate.

Geithner’s prepared testimony makes no reference to Libor.

Instead, he will tell Congress about the state of the financial system.

“The strategy adopted by the United States to repair and reform the financial system after the crisis has helped produce a stronger and more resilient system,” he will say.

He will tout the TARP program, which is expected to produce $22 billion in profits for taxpayers, efforts to reduce financial sector debt (down $3 trillion) and household debt (down $900 billion), and the government’s leverage in forcing banks to keep more capital on hand to reduce risk to the system.

“The overall impact of these changes is very important. They have made the financial system safer, less vulnerable to future economic and financial stress, more likely to help rather than hurt future economic growth and better able to absorb the impact of failures of individual financial institutions,” he plans to say.

But Geithner will also outline the serious threat posed by the European debt crisis.

“The combined economies of the euro area constitute the second-largest economy in the world and are home to many of the world’s largest and most interconnected financial institutions,” he says in his prepared remarks. “As a result, a severe crisis in Europe would necessarily have very substantial, adverse effects on the United States.”

In addition, Geithner will push lawmakers to resolve their differences on the major tax and spending issues of the day to help alleviate uncertainty and mounting debt.

“The United States faces fiscal deficits that are unsustainable over the long run,” he plans to say. “The failure of policymakers to enact reforms in a timely and credible manner will be damaging to future economic growth.”

He will also relay the council’s recommendations for strengthening the economy: addressing weaknesses in money market funds and the tri-party repo market, protecting customer funds at institutions that invest, improving internal controls at financial firms and reforming the housing finance system.